India Inc.’s challenge: Creating quality jobs amid informal work dominance

INDIA’S JOB CRISIS has persisted for decades, with successive governments unable to resolve it. Though India’s unemployment rate has come down over the years, about 82% of the population is still dependent on the informal sector. The proliferation of informal employment has created a ‘bubble-like situation’. Despite a low reported joblessness rate, underemployment is widespread. And youth unemployment is a critical pain point. Around 65% of India’s population is under 35 and 27.2% is between 15 and 29. Self-employment, the most widespread, provides little income.

The solutions are not easy to come by considering the contradictory picture given by different unemployment figures. Official data shows low unemployment but numbers from Centre for Monitoring Indian Economy (CMIE), a private think-tank, tell a different story. The latest Periodic Labour Force Survey (PLFS) shows that India’s unemployment rate of 3.2% in 2024 (July 2023–June 2024) is below the global average of 5.1%. It dipped from 6% in 2018 to 4.2% in 2021 and 3.6% in 2022. At the same time, the youth unemployment rate declined from 17.8% in FY18 to 10% in FY23. It had surged from 5.7% in 2000 to 17.5% in 2019 before easing to 12.4% in 2022 and 10% in 2023. Post-Covid, there has also been an increase in female participation, thanks to supportive Central government policies. The labour participation rate for women older than 15 years surged from 22% in FY18 to 40.3% in FY24. The progress can be attributed to schemes such as MUDRA, Kaushalya and MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act, 2005) that focus on self-employment and skill development. Still, India has one of the lowest female labour participation rates, indicating room for progress. However, in spite of low unemployment figures, a concerning trend has emerged.

The share of “self-employed” among adults over 15 increased from 67.7% in 2022 to 71% in 2023, as per the International Labour Organisation’s 2024 report in April. For those aged 15-29, the number surged from 69.3% in 2022 to 73.8% in 2023. The average monthly wage for adults dipped from ₹10,925 in 2023 to ₹10,790 in 2024 and for youth from ₹9,281 to ₹8,193. Data from CMIE indicates India’s unemployment rate spiked post-Covid and has stabilised at 7-8% since 2020. In absolute terms, employment in India rose from 47.15 crore in FY15 to 64.33 crore in FY24, a 36% increase, according to an RBI database. Between FY18 and FY24, the total employment increased by approximately 16.83 crore. The worker-population ratio for the 15-plus age group climbed to 56% in FY23 from 52.9% in FY22 and 52.6% in FY21, according to the government’s PLFS data.

India’s Economic Pillars

One of the biggest reasons for prevalence of low-paying jobs is that India’s economy — comprising agriculture, manufacturing and services — depends heavily on agriculture for job creation. The sector employs 46.1% workforce but contributes only 12% to the gross domestic product (GDP). Manufacturing employs 24.3% working population but accounts for 27% of GDP. The services sector employs just 29.7% but is over 60% of the economy. The declining trend of labour participation in agriculture changed direction after Covid. The share of employees working in the agriculture sector increased from 45.6% in FY20 to 46.1% in FY24. Manufacturing and services saw a modest rise in job creation during this period, reflecting sectoral resilience. Government initiatives such as the production linked incentive (PLI) scheme, alongside growth in other service sectors and rising female workforce participation, have helped sustain job momentum. However, economist Rumki Majumdar from Deloitte India says construction and agriculture are dominated by “low-skilled” jobs. “This is a major concern, as these sectors are also the biggest employers in India,” she notes in India Economic Outlook for October 2024, underscoring the need for high-quality jobs.

Services vs Manufacturing

Post-pandemic, employment in agriculture and construction has risen. However, these sectors remain dominated by “informal, casual and self-employed workers,” says Deloitte. Manufacturing, also encompassing mining, quarrying, electricity and water supply, saw a rise in job creation, bolstered by capital expenditure and infrastructure initiatives, with workforce participation climbing from 23.7% in FY20 to 24.7% in FY24. Meanwhile, jobs in the services sector peaked at 32.3% in FY19, easing to 29.7% in FY24.

The latest HSBC Flash India Composite Output Index survey captures this momentum. The index, which measures manufacturing and services output, was at 58.6 in October, up from 58.3 in September, a major improvement from its long-term average of 54.7. The survey shows a quicker increase in factory production and services activity. “New and export orders expanded at faster rates, providing a good omen for industrial production for the remaining months of 2024,” says HSBC chief India economist Pranjul Bhandari. Yet, manufacturers continue to face margin pressure due to high input prices. “They are trying to pass on higher costs to downstream consumers by raising output prices,” says Bhandari. The HSBC India manufacturing purchasing managers index (PMI) recovered from September’s eight-month low of 56.5 to 57.4 in October. This reflected improved conditions across new orders, output, jobs, delivery times and stocks. Indian businesses reported a sharp increase in new orders in October 2024.

Manufacturing did better than services in output and sales, yet services showed “stronger” hiring (57.9). This was a breather from September when the services PMI touched a 10-month low and fell below 60 for the first time in 2024 — the HSBC India Services PMI was at 57.7 in September, from 60.9 in August, 60.3 in July and 50.5 in June. GlobalData senior economist Bindi Patel says “weak export demand and high input costs” have slowed growth in the services sector. Aditi Gupta, an economist at Bank of Baroda, echoes this view. She attributes the slowdown to weak external demand and reduced discretionary spending by large clients, which has impacted export orders. Gupta says despite these challenges, September’s services PMI grew for the 38th straight month. Hiring was more pronounced in services in October. The increase in employment was “sharp and quickest in 18-and-a-half years”. Notably, IT hiring picked up pace in Q2 FY25 on pick-up in demand, with top IT services majors Tata Consultancy Services, Infosys, and Wipro adding 8,380 employees collectively. India’s IT services companies plan to recruit around 90,000 freshers this financial year. Patel adds the long-term services growth “continues to remain positive, along with strong employment growth.” India’s services sector is the largest contributor to its GDP. It drives growth in industries like IT, finance and telecommunications.

Challenges in Workforce

Patel of GlobalData says the biggest challenges on the external side are global economic slowdown and weak external demand. “Consequently, high input-cost inflation (labour and transportation) would further squeeze the margins of companies.”

Companies will face competition from those incorporating AI tools, automation and blockchain. This underscores the need to adopt advanced tech at scale, she says. Other obstacles include regulatory compliance, catering to customer demands, ensuring data protection, infrastructure, shortage of skilled labour and limited technology adoption.

Gupta of Bank of Baroda says it’ll be interesting to see how the global economy fares in the backdrop of a slowdown in key markets like the E.U., the U.S. and the U.K. “Domestic demand, too, is showing softness led by a slowdown in urban demand.” She says steady employment levels show a pick-up in hiring. “Headcounts at IT firms saw an uptick in Q2 as firms anticipate revival of the economic cycle. With the festive season on, this trend is likely to continue.”

To manage the pressure on margins, firms must focus on optimising operational efficiency. “Investing in upskilling and cross-skilling, especially in AI, may prove beneficial in the long term.” Firms are expected to gradually incorporate the increase into their selling prices. This approach considers consumer sensitivity to price changes. “This is important since there has been a slowdown in urban demand due to high inflation,” says Patel.